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Introduction to Taxes

I still remember the first time I got a paycheck from working at a local fun park.  I had worked a lot during those two weeks and was expecting a $300 paycheck.  I had already worked up a plan in my head of what I was going to do with the money.  And then I showed up to work to pick it up and was totally surprised to see that it was only about $245.  I thought they had forgotten to pay me for a day or two so I went to the office manager and explained the situation to her and she let me know that it was a smaller check than I was expecting because I had to pay taxes.

Don't get me wrong, I knew when people made money that they had to pay taxes.  But I didn't realize exactly how much I would be paying to the government.  My pay stub showed me that if there's one thing the government likes to do it's tax people.  After all, there are federal taxes, state taxes, property taxes, sales taxes, excise taxes, social security taxes, Medicare taxes, capital gains taxes, corporate taxes, and local taxes.  I don't know about you but I hate paying any taxes at all?let alone taxes on so many different things.

But taxation is an important part of our government.  The government acts as a very large business with lots of debt and expenses so they have to create a revenue stream by taxing the people.  And as a US citizen, you'll be paying these taxes throughout your entire life, so this article will explain to you a few different types of taxes and how to pay your taxes.

Income Taxes Click here for more information about various taxes

Income taxes are pretty easy to understand.  Basically, how they work is that when you have a job and are making money, a portion of your income is withheld to pay taxes.  If you look at one of your pay stubs from your job, you'll notice that taxes are being taken out.  You'll probably notice that there's a few different things they're categorized under.  On your paycheck, you'll see money going to the federal government in general, social security, Medicare, and the state government.  How much you pay depends on the tax bracket you're in.

Investment Taxes

When you invest, you also have to pay taxes on your investments.  This is something that a lot of people fail to realize when they're first starting out with investing.  Basically, you pay taxes only on the amount of money that you make.  So if you bought one share of XYZ stock for $10 per share and sold it for $20, you would have a capital gain of $10, which you would have to pay taxes on.

The nice thing about capital gains taxes is that you're given an incentive to hold the stock longer.  If you hold the stock for at least a year, you qualify for a reduced capital gains tax.  So stick to the long-term!

Other Taxes

If you're pretty young, you're not gonna have to worry about other taxes for a while, with the exception of sales tax.  The other taxes I'm referring to are property taxes (taxes on your home and real estate), excise taxes (taxes on gas, cigarettes, gambling, etc.), and corporate taxes (taxes businesses pay).  Basically, there's a lot of taxes grouped into this category.

Preparing Your Taxes

If you've ever done your taxes before or have known someone who does their own taxes, you probably know how hectic tax season can be.  Every year between January and April, people frantically prepare their taxes in order to get them in by the April 15th.  We hear about this all the time but to someone who hasn't filed taxes before, this whole process is probably a giant mystery.

The first thing you have to know is that people don't file their taxes in the same year that they made the money.  You actually file taxes for this year's income next year. So if you made money in 2004, you would file those taxes in early 2005.

Every January or February, employers send all of their employees a W-4 form.  This form tells the employees exactly how much they made last year and how much of their money was withheld for taxes.  Once the individual has his or her W-4, they fill out federal income tax forms (a "1040") and this form tells the government how much money they have made from their job, investments, etc in order to determine how much the person should have paid in taxes.

Another important thing about the 1040 is that it lists the person's deductions.  A deduction is something that allows a person to reduce their taxable income.  For example, if you spent $3,000 of your income on a new computer for your business, the government doesn't expect you to pay taxes on that $3,000 so you are allowed to deduct it from your taxes.  For example, if you made $45,000 last year and spent $3,000 on that computer, you are only expected to pay taxes on $42,000 of income.

Once you figure out how much your income was after deductions, the 1040 will tell you if you owe the IRS more money or if they owe you money.  If, for some reason, you've paid more than you need to in taxes, the government will issue you a tax refund and you are allowed to keep that money.

Once you've completed your tax forms, you simply mail them in and patiently wait for that tax refund to come in the mail.  And, of course, you relax for about nine months before having to worry about filing your taxes again.

So that's your introduction to paying your taxes.  They're not fun but it's important to know about it.  I strongly urge you to read the other articles in this section, especially the one on how you can save yourself money on your tax bill.

 

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Discuss It!

Brenda Franklin said:

Friends of mine have just relocated from UK to VA. Is there a TurboTax product that can help them "translate" their UK taxes to US taxes?

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